35.10.1  Awards of Litigation and Administration Costs and Fees

35.10.1.1  (08-11-2004)
Awarding of Costs and Fees Under Section 7430

  1. The material in this chapter uses the term deficiency. Worker classification employment tax cases under section 7436 do not involve a deficiency (as defined in section 6211). The principles set forth below, however, apply to section 7436 cases as if the section 7436 notice of determination were a notice of deficiency. In addition, decisions in certain post-assessment proceedings such as interest abatement, spousal relief, and collection due process cases do not necessarily determine "deficiencies." Often, such cases determine "liabilities" or determine periods of interest abatement or other forms of relief.

  2. The Tax Equity and Fiscal Responsibility Act, Pub. L. No. 97–248 (TEFRA) added section 7430 to the Internal Revenue Code. This section provides for awards of litigation and administrative costs to prevailing parties other than the government in tax related suits in a court of the United States, including the Tax Court. For a discussion of attorneys’ fees suits filed in district courts and the Court of Federal Claims, please refer to CCDM Part 36. It should also be noted that the Equal Access to Justice Act, Pub. L. 96–481, 94 Stat. 2325, does not apply to Tax Court proceedings. See 28 U.S.C. § 2412(e).

35.10.1.1.1  (08-11-2004)
Motions for Attorneys Fees and Costs

  1. Section 7430(a) provides that the prevailing party in any administrative or court proceeding may be awarded a judgment for:

    1. Reasonable administrative costs incurred in connection with administrative proceedings within the Internal Revenue Service, and

    2. Reasonable litigation costs incurred in connection with court proceedings.

  2. A prevailing party is defined as a taxpayer who substantially prevails as to the amount in controversy or with respect to the most significant issue or set of issues. Section 7430(c)(4)(A)(i); Treas. Reg. § 301.7430–5(a)(2). A party will not be treated as the prevailing party if the government establishes that its position was substantially justified. Section 7430(c)(4)(B)(i). The Service will be found to be substantially justified where his position had a reasonable basis in both law and fact. A position is also substantially justified if the position is justified to a degree that could satisfy a reasonable person. The Service’s position may be incorrect, but nevertheless be substantially justified if a reasonable person could think it correct. The taxpayer must also meet the net worth requirements of 28 U.S.C. § 2412(d)(1)(B) to meet the definition of a prevailing party.

  3. For litigation costs, the position of the United States is taken by the Service as of the answer to the petition. With respect to administrative costs, the position of the United States is taken as of the earlier of the date of the statutory notice of deficiency or the receipt by the taxpayer of notice of the decision of the Appeals office. For purposes of section 7430, the Service treats a notice of Final Partnership Administrative Adjustment and a notice of Final S Corporation Administrative Adjustment the same as a statutory notice of deficiency.

  4. Expansion of Authority to Award Costs and Certain Fees. The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98), Pub. L. No. 105–206 modified section 7430 to allow for recoveries of reasonable administrative costs back to the date of the first letter of proposed deficiency that allows a taxpayer an opportunity of administrative review in Appeals. The point of determining the reasonableness of the Service’s determination, however, has not changed. This point remains at the time the matter is finally determined by Appeals or at the time the notice of deficiency is issued. RRA98 also raises the hourly rate cap to the amount provided in the Equal Access to Justice Act, expands the reasons available for exceeding that hourly rate cap, considers losses in other circuits to be relevant to the issue of substantial justification, allows for the recovery of fees by pro bono representatives, and imposes a rule awarding litigation and administrative costs where the Service rejects a "qualified offer" during the " qualified offer period" and later recovers less than the amount offered.

  5. Section 7430 has been amended several times since its introduction by TEFRA. As a result of these amendments, the section applies in three different forms depending on the time period in which a case was commenced. As originally enacted, section 7430 applied to cases instituted after February 28, 1983, and before January 1, 1986. For cases commenced after December 31, 1985, with claims to be paid after September 30, 1986, the Tax Reform Act of 1986, Pub. L. No. 99–514, altered the definition of "prevailing party " under section 7430. The Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100–647 (TAMRA) amended section 7430 for cases and administrative proceedings commenced after November 10, 1988.

  6. Written Responses. Under T.C. Rule 232(a)(2), the court may direct respondent to file a written response to petitioner’s motion for an award of reasonable litigation or administrative costs. The response shall be filed within 60 days after service of the motion. Even when the court does not direct a written response under T.C. Rule 232(a)(2), respondent will file a written response to every motion for reasonable litigation or administrative costs. Thus, in those cases in which the court has not directed a written response, Field Counsel will send a notice that respondent will file a response. This notice should promptly be sent to the court upon receipt of petitioner’s motion. The only situation in which a written response is not required is when respondent is fully settling the cost issue.

    1. All written responses must be submitted to the Associate Chief Counsel (P&A) for review before filing with the court. See Exhibit 35.11.1–1 (Tax Court Documents Requiring Associate Office Review). Responses shall contain the statements required by T.C. Rule 232(c). To facilitate the preparation of the written response, early coordination with the Associate Chief Counsel (P&A) is required.

    2. All written responses must be received in the Associate Chief Counsel (P&A) at least ten calendar days before they must be filed with the court. The Associate Chief Counsel (P&A) will further coordinate all attorney’s fees motions with the Associate office controlling the underlying substantive issues of the case.

    3. When a written response has not been filed and the court grants an award of litigation or administrative costs, the Field attorney should immediately notify the Associate Chief Counsel (P&A). Field Counsel should also consider filing a motion for reconsideration with the Tax Court. The motion for reconsideration must be received by the Associate Chief Counsel (P&A) for review at least five calendar days before it must be filed.

    4. In drafting a response or a motion for reconsideration, in addition to the elements required by T.C. Rule 232(c), the response should include any matter inside or outside of the courtroom which unreasonably delayed the conclusion of the litigation, such as petitioner’s failure to comply with the court’s orders or refusal to stipulate to matters which fairly should have been stipulated.

35.10.1.1.2  (08-11-2004)
Settlement Authority

  1. This subsection discusses settlement authority.

35.10.1.1.2.1  (08-11-2004)
Appeals Office

  1. Appeals, in docketed cases in which it proposes to agree to an award in the litigation or administrative cost issue, will prepare a memorandum stating the rationale for such an award.

  2. Appeals will forward that memorandum to Field Counsel, along with the files, to evaluate such a settlement. Appeals will send a copy of the memorandum to the Director, Appeals.

  3. Field Counsel will independently evaluate the proposed settlement. If Field Counsel concurs with the settlement, a memorandum will be prepared setting forth the reasons for accepting the settlement and explaining why it believes the fee is justified. This memorandum should discuss the statutory requirements embodied in section 7430.

  4. The memorandum and files will be sent to the Associate Chief Counsel (P&A). All cases in which Field Counsel proposes to agree to an award of costs must be submitted to the Associate Chief Counsel (P&A) for approval prior to being filed with the court, with the exception of those which may be settled by Field Counsel. See Exhibit 35.11.1–1 (Tax Court Documents Requiring Associate Office Review).

35.10.1.1.2.2  (08-11-2004)
Field Counsel

  1. With the following exceptions, the litigation or administrative cost issue in pending Tax Court cases cannot be settled without the approval of the Associate Chief Counsel (P&A). Settlement authority has been delegated to Field Counsel in the following situations:

    1. The litigation costs settlement offer does not exceed $25,000 and the administrative costs settlement offer does not exceed $5,000;

    2. The taxpayer has exhausted available administrative remedies;

    3. No prepetition expenses are awarded other than reasonable attorney’s fees for the preparation and filing of a petition in the Tax Court;

    4. Payment for attorney’s fees in excess of the hourly fee prescribed by statute may only be made where it is determined that the conditions for a higher hourly rate set forth in section 7430(c)(1)(B)(iii) are likely to be satisfied by opposing counsel;

    5. Payment for attorney’s fees in excess of the hourly fee prescribed by statute based on an increase in the cost of living may not be based on a period for the calculation of this increase beginning before January 1, 1986, and;

    6. In pro se cases only the filing fee and other reasonable court costs are to be paid; no lost opportunity costs are to be included.

35.10.1.1.2.3  (08-11-2004)
Associate Chief Counsel (P&A)

  1. The following settlements under section 7430 require the approval of the Associate Chief Counsel (P&A) regardless of the amount involved:

    1. The settlement awards any costs based on a not substantially justified position of the United States based on a position taken prior to the statutory notice of deficiency; or

    2. The settlement awards litigation costs for an individual licensed to practice before the Service but not before the Tax Court; or

    3. The settlement awards litigation costs incurred in an appeal to the Tax Court of the administrative denial of reasonable administrative costs.

35.10.1.1.3  (08-11-2004)
Decision Documents, Payment of Costs, and Appeals of Awards

  1. This subsection discusses decision documents, payment of costs, and appeals of awards.

35.10.1.1.3.1  (08-11-2004)
Decision Documents

  1. See CCDM 35.8.2.6 for a discussion of decision documents in cases involving attorneys’ fees under section 7430.

35.10.1.1.3.2  (08-11-2004)
Payment of Attorneys’ Fees and Costs

  1. Litigation and administration cost awards are paid by the General Accounting Office from the General Judgment Fund. In cases where an award has been made, or this issue has been settled, the attorney to whom the case is assigned should complete an Award Data Sheet. See Exhibit 35.11.1–208. A copy of the decision must be attached to the Award Data Sheet, otherwise the General Accounting Office will not process payment. After completion it should be sent to the Associate Chief Counsel (P&A), Attn: Post Litigation Unit for transmittal to the General Accounting Office for payment. In most cases where the decision both awards litigation costs to the petitioner and determines a deficiency, the General Accounting Office will offset the deficiency against the litigation costs award. The Department of the Treasury will notify the appropriate Service Center to have the petitioner’s account credited with the amount of the offset. See Exhibit 35.11.1–209, Payment Memorandum with Offset, and Exhibit 35.11.1–210, Payment Memorandum without Offset.

35.10.1.1.3.3  (08-11-2004)
Appeal of Awards

  1. Under section 7430(f), an order granting or denying litigation costs is incorporated into the decision or judgment in the case. The time period for requesting an award is cross-referenced to 28 U.S.C. § 2412(d)(1)(B), unless the court establishes differing rules. Since T.C. Rule 231 prescribes a different time period for requesting an award, Field Counsel should continue to follow T.C. Rule 231 for cases in Tax Court. Such an award is appealable in the same manner as the decision or judgment and thus awards in " S" cases are not appealable. An award or denial at the administrative level is appealable to the Tax Court for cases falling under TAMRA.

35.10.1.2  (08-11-2004)
Actions for Administrative Costs

  1. Section 7430(f)(2), effective with respect to proceedings commenced after November 10, 1988, establishes jurisdiction in the Tax Court to decide appeals of taxpayers from decisions by the Internal Revenue Service denying awards for reasonable administrative costs within the meaning of section 7430(c)(2).

  2. An action under T.C. Rule 271 is a separate litigation proceeding and is to be distinguished from a proceeding initiated by a motion under the Tax Court Rules of Practice and Procedure involving a dispute with respect to litigation costs and administrative costs where a deficiency proceeding is already before the Tax Court. See T.C. Rules 230 through 233.

  3. An action brought under T.C. Rules 270 through 274 for administrative costs is the commencement of a new case having nothing to do with litigation of a deficiency and is an informal proceeding analogous to a proceeding in a small tax case. See T.C. Rule 274. Not all rules of small case procedure are applicable. For example, answers are required to be filed in all such cases under the provisions of T.C. Rule 272.

35.10.1.3  (08-11-2004)
Qualified Offer Rule

  1. Section 3101 of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA98), Pub. L. No. 105–206, made several modifications to section 7430, including the addition of a qualified offer rule effective for costs incurred after January 18, 1999.

  2. In general, a prevailing party may recover the reasonable administrative and litigation costs incurred in administrative and court proceedings if the proceedings relate to the determination or refund of any tax, interest, or penalty under the Internal Revenue Code. Under the statute, as amended by RRA98, the making of a qualified offer may result in the taxpayer being treated as a prevailing party for purposes of a recovery of costs. A taxpayer is a prevailing party by reason of making a qualified offer if the taxpayer’s liability under the last qualified offer would equal or exceed the amount of the taxpayer’s liability under the judgment entered by the court.

  3. Additional Requirements For Qualifying as a Prevailing Party. To qualify as a prevailing party under the statute, taxpayers must meet the net worth requirements of section 7430(c)(4)(A)(ii). Furthermore, to qualify for an award, taxpayers must meet the remaining requirements of section 7430, such as not unreasonably protracting the proceedings and, for purposes of an award of litigation costs, exhausting their administrative remedies. On the other hand, a taxpayer qualifying as a prevailing party by reason of having made a qualified offer need not substantially prevail on either the amount in controversy or the most significant issue or set of issues presented. Similarly, whether the positions of the United States in the administrative and litigation proceedings were substantially justified is not relevant for an award under the qualified offer rule.

    1. A taxpayer cannot qualify as a prevailing party under this rule if the determination of the court with respect to the adjustments included in the last qualified offer is entered exclusively pursuant to a settlement. Neither can a taxpayer qualify as a prevailing party under this rule in any proceeding in which the amount of tax liability is not in issue, including any declaratory judgment proceeding, any proceeding to enforce or quash any summons issued pursuant to the Internal Revenue Code of 1986, and any action to restrain disclosure under section 6110(f).

  4. The comparison of the taxpayer’s liability under the qualified offer with the liability under the judgment is central to the operation of the qualified offer rule. For a complete discussion of liability under offer and liability under judgment, please refer to Treas. Reg. § 301.7430–7(b)(2), (b)(3).

  5. An award based upon the taxpayer having made a qualified offer is limited to those reasonable administrative and litigation costs incurred on or after the date of the last qualified offer. If the taxpayer is a prevailing party without regard to the qualified offer rule, the reasonable administrative and litigation costs to which the taxpayer is thus entitled may not be awarded again by reason of the taxpayer having made a qualified offer. On the other hand, even though some costs in a proceeding may be awarded without regard to the qualified offer rule, it is possible for other costs in the same proceeding to be awarded under the qualified offer rule. For instance, costs incurred in different portions of the proceedings or with regard to different adjustments at issue may be awarded under the qualified offer rule despite the awarding of other costs without regard to the qualified offer rule.

35.10.1.3.1  (08-11-2004)
Requirements for Qualified Offer

  1. A qualified offer is a written offer that

    1. Is made by the taxpayer to the United States during the qualified offer period;

    2. Specifies the amount of the taxpayer’s liability (determined without regard to interest);

    3. Is designated as a qualified offer at the time it is made; and

    4. Remains open until the earliest of the date the offer is rejected, the date the trial begins or the 90th day after the date the offer is made.

  2. In order to meet the requirement that the offer specifies the amount of the taxpayer’s liability, the offer must establish the taxpayer’s liability (determined without regard to interest) by setting forth the dollar amount of the taxpayer’s offer, as stated above, on all of the adjustments at issue in the proceeding at the time the qualified offer is made. Furthermore, Counsel will treat the fourth requirement, that the offer remain open until the earliest of the date rejected, trial begins or 90 days, as being met if, by its terms, the offer remains open at least until the earliest of those dates. If such an offer were to remain open longer than those three minimum periods, it would not fail to meet this requirement.

  3. Aside from the minimum period during which a qualified offer must remain open, a qualified offer must be made during the qualified offer period. That period begins on the date the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent. The qualified offer period ends on the date which is 30 days before the date the case is first set for trial. In the United States Tax Court, cases are placed upon a calendar for trial and at the calendar call cases are scheduled for a specified day for trial during that trial calendar. Consequently, in determining when the qualified offer period ends for cases in the Tax Court and other courts of the United States using calendars for trial, the Office of Chief Counsel will consider a case to be set for trial on the date scheduled for the calendar call. Cases may be removed from a trial calendar at any time. Thus, a case may be removed from a calendar before the date which is 30 days before the date scheduled for that calendar. In order to promote the settlement of such cases, the Office of Chief Counsel will consider the qualified offer period as remaining open if the case is removed from the calendar more than 30 days prior to the original calendar date. If the case is removed within 30 days of the calendar date set, the qualified offer period ends on the date which is 30 days prior to the scheduled date of the calendar call for that trial session. The qualified offer period may not be extended or reopened, although the period during which a qualified offer remains open may extend beyond the end of the qualified offer period.

  4. In order to better monitor these cases and identify issues regarding the qualified offer rule with respect to which additional guidance may be necessary, Field Counsel is to promptly notify APJP, Branch 3 upon the receipt of any settlement offer that purports to be a qualified offer. See Exhibit 35.11.1–1 Tax Court Documents Requiring Associate Office Review.


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